I held off writing this week’s post when I heard that at 7 o’clock this morning (Thursday, 11 December 2014) the FCA was set to reveal the findings of its thematic review into the annuities market. If you want to read it for yourself, click here.
No big surprises
The results make interesting reading, although the overall message shouldn’t come as a surprise to anyone. The FCA has had a concern for some time that not enough people in practice were shopping around for the best annuity rate when they came to draw their retirement benefits. Especially as its research had previously shown that customers buying standard annuities could on average be £67 a year better off by shopping around. The problem was that research had shown only about 40% of consumers were actually shopping around.
Actually, though, you might be forgiven for thinking that this issue has gone away to a certain extent. After all, the changes announced in this year’s Budget mean much more flexibility, and as George Osborne said, no one should be forced to buy an annuity to provide their pension income in future. Add to this the introduction of the proposed guidance service in the first quarter of 2015, and it looks as if we’ll have empowered consumers who won’t need firms to help them make their retirement choices.
But that’s not the case. The FCA has made it quite clear that firms will be required to play their part in making sure consumers make the right choices. And before they do so, firms will be required to put some things right that the FCA have found to be wrong.
In order to test the quality of firms’ sales practices when it came to annuities, the FCA measured their performance against four pre-set customer outcomes, derived to a certain extent from existing rules, and the ABI Code of Conduct on Retirement Choices. These four outcomes were (to paraphrase):
Customers are encouraged to shop around
- They’re given enough information about guaranteed annuity rates and market value reductions
- They’re told about enhanced annuities, and the fact that these can also be bought on the open market, not just from the provider; and
- They’re given the right information about the different annuity shapes available (e.g. level or escalating, single or joint life).
How did we do?
Honestly? As an industry, it looks like the verdict from the FCA is “could try harder”. Not in every aspect, though. There are some things that are being done well, and the FCA has been good enough to lay out not just the poor practices it has found in firms, but the good ones as well.
But it’s in the poor practices that you find the problems. Start at the top and you’ll find the FCA’s biggest concern is around the way in which firms promote the benefits of shopping around generally.
Drill down a bit further and you’ll see there’s a real concern about how firms communicate the benefits of enhanced annuities.
Go down a bit further again, and you’ll see one issue that cuts across all of this – and that’s the information provided to customers during their conversations with firms’ staff over the telephone.
And finally, you get right to the bottom of the issue. That’s right – it’s firms’ training arrangements.
Training is really in there
But don’t just take my word for it. The FCA has stated categorically that during its analysis of the material gathered as part of this review, it found examples of training that failed to cover important areas, such as, well, the outcomes highlighted above really. But most concerning of all, the need to shop around and, specifically, how to actually shop around.
Going hand in hand with this is the lack of adequate call scripts to deal with these situations. So the FCA found in a number of instances that the combination of poorly trained and supported staff was driving some unsatisfactory consumer outcomes.
What’s to be done?
For those firms who took part in the review, the FCA has said it will intervene directly to work with the firm to make improvements to training and call scripts. But where does this leave the rest of the industry?
By the look of things with a lot more work to do. At the moment, firms will have their hands full getting ready to deal with the new flexibilities that are being made available from next April. You could argue that with all the work going on, this is the last thing the industry needs to deal with right now.
In reality, though, it looks like the FCA has done the industry a favour. Right now many firms will “have the bonnet up” in terms of reviewing their communications, call handling arrangements and call scripts. So, to use a motoring analogy, why not take the opportunity to give the engine a bit of a tune whilst fitting the new turbocharger?
Training arrangements should be on the agenda for most firms at the moment anyway. The new flexibilities will take a while for people to get to grips with, especially if they’ve been used to dealing with just annuities and tax-free cash for years.
No doubt internal training arrangements are a very good way of delivering the necessary knowledge and understanding at the point of need for front line staff, but what about those in the firm who need to have the wider knowledge from a control perspective? And what about training the trainers? This is where external training comes in.
I’m sure that, especially in the New Year, the number of training opportunities, and opportunities to share knowledge and understanding, will increase quite a bit in relation to the subject of pensions.
And if, having read the FCA report, you feel like your firm’s training arrangements need a bit of a kick start (sorry to go back to engines again), here’s the best place to start.
By Martyn Oughton a Professional Member of the International Compliance Association (ICA). Martyn now writes a regular blog for Industry Events Online focusing on the importance of training in all aspects of compliance. Read Martyn's other publications at Martyn's Writers' Residence website.
To keep up to speed with new events and blog posts sign up to the Industry Events Online weekly newsletter.